Changes to Malta’s participation exemption regime

The third proviso to Article 12(1)(u)(1) of the Income Tax Act, has been amended so that gains or profits derived by a company registered in Malta (the transferor company), arising on the transfer of a participating holding in a company resident in Malta or a participating holding in any other body of persons that holds directly or indirectly shares in a company that is resident in Malta shall only qualify for the exemption from tax if such gains or profits would have been exempt had the transfer of the holding been made directly by the beneficial owner of the transferor company. 

A transfer of a holding made by the beneficial owner of the transferor company would have been exempt from income tax if the beneficial owner is not resident in Malta and such person is not owned and controlled by, directly or indirectly, nor acts on behalf of an individual or individuals, who are ordinarily resident and domiciled in Malta.  In terms of Article 12(1)(c)(ii) of the Income Tax Act, gains derived by non-residents from the transfer of shares in companies which are not property companies, will be exempt from tax in Malta. 

In situations where the beneficial owner of the transferor company is more than one, and gains or profits made by one or more on the transfer of their holdings, would have been exempt from tax, while others would not have benefitted from the exemption, the exemption on the gain derived by the transferor company will apply to that part of the gain or profit to which the exempt beneficial owner/s is/are beneficially entitled. 

Furthermore, if the transferor company benefitted from the participation exemption on the whole or part of the gains and any beneficial owner who would not have been entitled to benefit from the exemption in terms of Article 12(1)(c)(ii) becomes later beneficially entitled to all or any of such gains or to a larger part than that to what he was entitled to at the time they arose, such untaxed gains would be subject to tax at the rate of 35%.  Such tax shall constitute tax payable by the company in the year of assessment in respect of which such beneficial owner becomes entitled to such profits even prior to their distribution by way of dividends. 

Prior to the amendments, the gain derived by the transferor company would have been exempt from tax.  However, where the direct shareholder of the transferor company was an individual resident of Malta or where the individual beneficial owner was a person who was both resident and domiciled in Malta who held an indirect shareholding in the transferor company through a company not resident in Malta, he would be subject to the deeming provisions in terms of Article 43(6)(c) of the ITA, meaning that he would be subject to tax on his share of the gain, even if the gains would not have been distributed to him by way of dividends. 

By virtue of the above-mentioned amendments whereby the gain made by the transferor company would only be exempt from tax if the individual beneficial owner of the transferor company is a person who is not resident of Malta (and therefore exempt from tax had the transfer of the shares been made directly by him), the deeming provisions referred to above have been removed as a consequence. 

How can we help?  

For further information, please contact either Stephen Balzan on [email protected] or Elaine Camilleri on [email protected].  ACT can help you understand the changes to the income tax rules and how these can impact your business. 

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected].

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